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PHILIP MORRIS USA TO: DIS TRIB U TION FRO M: Carl Cohen SUBJECT: C A _LY~rA= ... -- - - -- - ~ INTER-OFFICE COR ESPONDENCE 120 PARK AVENUE, NEW YORK, NY 10017-5592 DATE: March 31, 1993 / VIRGINIA SLIMS BOOKL.ET PK nF.VF.i.nPMFNT Attached is a memo to Suzanne LeVan detailing status and recommending next steps for the booklet pack. At this point we should proceed with the recommended plan. Specifically, we must move forward with the paperwork to purchase the six packer prototype machine and prepare for a quantitative test in May. Please call with any questions or comments on ext. 3750. steps with the project team. Details will be forwarded by Don Brookman. A meeting will be held in Richmond on Wednesday, Apri17, 1993 to discuss detailed next DISTRIBUTION: RICHMON D C. Altizer D. Brookman C. Campbell A. Collins L. Coleman T. Foster C. Hansen W. Harris, Jr. R. Heretick M. Jeltima A. Lopez A. McDaniel T. Meade D. Newman R. Newsome L. Robinson M. Suter L. Wettle E. Wooldridge NEW YORK J. Bonhomme F. DellaCrosse E. Gee S. LeVan C. Shore B. Trach M. Valinoti M. Walchak N 0 ~ 0 V ~ N ~ W O+ VS BOOKIST PACK DEV.CCME1b1O

PHILIP MORRIS USA INTER-OFFICECORRESPONDENCE 120 PARK AVENUE, NEW YORK, NY 10017-5592 TO: Suzanne Le Van DATE: 3/31/93 FROM: Carl Cohen SUBJECT: Virginia Slims King Size Development This forwards a product concept and development/test plan for Virginia Slims 85's and requests approval to purchase additional prototype machinery components for a 20 stick booklet pack. Overview Brand recommends continued development and testing of Virginia Slims Kings in the 20 stick booklet pack. Proposed pricing is branded discount, enabling Virginia Slims to offer the first discounted, female positioned 85mm product. The primary target audience is YAFS 18-24. Qualitative and quantitative testing are scheduled in the near future and a test market is recommended for 1/94. Management approval to spend $1.0 mm (for prototype machinery) is required to meet this test market date. A recommendation to purchase production machinery for a national launch (1/95) will follow the quantitative test. A detailed marketing plan for the test market will be forwarded after qualitative research is completed. Objective The objective of new Virginia Slims king size is to broaden the appeal of the brand among women smokers, particularly women 18-24. Rationale While 37% of all women smokers choose an 85mm cigarette, Virginia Slims offers only a 100mm product. Specifically, among YAFS (18-21) the usage of 85mm products is 63%. Recently, Virginia Slims has demonstrated less appeal among YAFS as reported by smoker share. An 85mm version may offer Virginia Slims an opportunity to gain smoker share among these YAFS and attract other women smokers who previously rejected the brand because of its' length. % Total VS smokers 9 at 92 Women smokers 18-21 2 3 3 22-24 8 6 6 18-24 5 4 4 Virginia Slims Kings gives the brand a unique opportunity to offer a discounted product. In today's market where approximately 20% of smokers choose a discounted product, Virginia Slims 100's has limited ability to compete. Discounted products are even growing among Yafs. Currently 11 % of age 18- 24 women smoke a discounted product, up +3.5 pts from year ago. While Virginia Slims currently promotes nearly 30% of its' volume, it is insufficient to defend against the onslaught of female discounted brands and deep discount prod ucts. N O .p 0 V C1i N .A w V

S ubject Date Page 2 Nielsen shows Virginia Slims 100's at 2.7 share down -0.53 share points versus year ago, while female discounted brands are up .39 and black and whites are up 16.1. A discounted king size product will fill two voids in the Virginia Slims arsenal: a king size product and a discounted product. Product The new cigarette as currently designed is a Virginia Slims blend in an 85mm, 24.0 circumference. Both medium (13mg) and lights(11 mg) versions have been developed in regular and menthol. The medium tar level was selected to help reverse product lightness perceptions often associated with VSlims and to help position the brand as unique and contemporary. It is also believed that after trial this product may deliver an acceptable smoke to some full flavor women smokers. A cork tip filter has been utilized for medium and white for lights. The menthol products are being designed to deliver a smoke similar to Newport, the second largest brand among YAFS after Marlboro. While product development continues to improve the menthol delivery it is agreed that the product is far enough along to include smokeable product in a quantitative test. Packaging A 20 stick booklet pack is the recommended box for Virginia Slims Kings. A 21 stick package was qualitatively tested among YAFS in Stamford, CT. and Los Angeles in June 1992 and was well liked. However, tax stamping execution and costs have focused recent structure development on the 20 stick pack. Importantly, this 20 pack will still require hand stamping but not a special stamp. Pricing/Profitability Recommended pricing is at the branded discount level, currently $51.45 per m units. While this is approximately $20.00 per m lower than current Virginia Slims pricing it is essential to enable the brand to compete. This price point will put a Virginia Slims packing at parity with discounted female brands. The competitive advantage for S lims is that it will be the first female positioned discount 85mm product. Current belief is that the booklet packaging will be perceived as a superior benefit and add significant value to Virginia Slims Kings, ultimately generating new volume. Detailed financials will be presented as more information about booklet pack costs and a detailed marketing plan are developed. Obviously, this endeavor must be profitable. It is reasonable however, to accept a lower margin given the belief that most units will be incremental to Virginia Slims. Target/Sources of Business The primary target audience is women smokers 18-24. The chart below indicates brand share among these women. Volume is likely to source from many brands, especially with the recommended discount pricing. Marlboro and Newport have the largest volume bases, while discount brand show the most momentum. ~ 0 .p 0 -4 cn N -p w ~

Subject Date Page 3 Brand Share of YAFS (18-24) 1991 1992 Marlboro 58% 55 Newport 12 12 Camel 4 5 Salem 3 3 Winston 3 2 Discount 7 11 Testinq Plan Additional qualitative testing is scheduled for March 29. The objective is to evaluate female smoker reactions to the booklet pack concept in the context of Virginia Slims Kings. It is basically a safety check to be sure we are in sync with consumers thinking before we go to a quantitative test. Included in the research is a visual concept board and two dramatically different graphic designs. Working and non working packages will be included. Smokers will be asked to select their preferred graphic. Qualitative learning will be incorporated into the concept board and /or graphics prior to quantitative testing. Within 4 weeks of the qualitative research, (May 1993) a quantitative product concept test will be conducted. The objective of this test is to confirm that the booklet pack is a worthwhile idea for Virginia Slims to pursue. Based upon the concept boards, packaging and smokeable product, the specific questions the quantitative research must answer are: - market share potential (if possible) -liking ratings -ideal pricing (premium or branded discount) -medium /lights/ medium lights tar level and descriptions -cannibalization to current Virginia Slims - who is the potential audience/source of volume -which is the preferred graphic design We will set quantifiable objectives after the qualitative research is completed. If the quantitative test meets its' objectives, we will recommend purchasing production machinery for a national launch. Costs need to be finalized but are estimated at $12.5mm. Estimated availability for launch is first quarter 1995. Given that timing for a national launch is less than optimal (1995), this recommends moving into test market. Proposed timing is January 1994 based on availability of prototype machinery. A formal commitment to finalize the purchase of this equipment is required asap and is detailed below. We recommend two test markets- one with branded discount pricing and one with premium pricing. This will ensure adequate learning regarding the maximization of profit. In addition to evaluating the upside on pricing, the objective is to master the execution of delivering a booklet pack to retail. This includes solving hand stamping and allowance issues with distributors and identifying and solving other potential challenges that may arise. A detailed test market recommendation will follow.

Subject Date Page 4 Machinery Develor2ment/Status In 1992 after qualitative research indicated appeal of the booklet pack, it was agreed that a prototype machinery complex would be assembled by reworking a packer on hand. This packer will enable us to produce individual 7 stick booklets. Estimated delivery date is May 1993. The wrapper and binder required to make these 7 packs into a 21 stick booklet has not yet been ordered. These parts plus installation will require approximately $500m of additional funding. This is not recommended based on tax stamping implications for a 21 stick pack. It is recommended that we order a 6 stick packer plus the wrapper and binder needed to assemble a booklet pack. This will enable us to produce sufficient quantities of 20 stick booklet packs and move into test market in January 1994. The estimated incremental funding is approximately $1.0mm. This covers the cost of the packer and installation and the wrapper and binder. Next Steps/Summarv_ -Obtain mgt approval to purchase balance of prototype machinery ASAP -Qualitative testing 3/29/93 -Quantitative research 5/93 -Designate booklet pack a company priority/order machinery for national launch (after positive quantitative results) 6/93 -Begin taste and odor testing of proposed graphics with 7 stick packs 6/93 -Launch 2 test markets 1/94 -Launch nationally 1/95 Suzanne, we are moving forward with continued development and testing of the booklet pack. We need management to okay the release of funds in order to meet the above schedule. Engineering is preparing the paperwork necessary for approval.